Morgan Stanley's Roach Says U.S. Is at Start of `Protracted Sluggishness'
Morgan Stanley's non-executive chairman for Asia Stephen Roach. Photographer: Daniel Acker/Bloomberg
July 19 (Bloomberg) -- Stephen Roach, chairman of Morgan Stanley Asia, talks about the U.S.'s budget deficit and exit strategy. Roach, speaking with Tom Keene and Ken Prewitt on Blomberg Radio's "Surveillance," also discusses China's economy and his investment focus. (Source: Bloomberg)
The U.S. economy faces a period of “protracted sluggishness” as consumers are wary to spend, said Stephen Roach, Morgan Stanley’s chairman for Asia.
“The U.S. is, I think, in the early stages of what is a very protracted sluggishness of domestic internal demand,” Roach, who is also a professor at Yale University, said in a radio interview with Tom Keene and Ken Prewitt on “Bloomberg Surveillance.”
The U.S. economy grew at a 2.7 percent annual rate in the first quarter, less than previously calculated, reflecting a smaller gain in consumer spending and a bigger trade gap, data showed last month. Consumer confidence slumped in July to the lowest level in a year, signaling that the biggest part of the economy is losing momentum, according to the Thomson Reuters/University of Michigan preliminary index of consumer sentiment published on July 16.
“The dynamism that we’ve gotten hooked and accustomed to, is just not going to be” there, Roach said.
The U.S. housing market took another step back in June as construction and purchases dropped, and a gauge of the outlook for growth signaled the expansion will lose steam, economists said before data due to be published later this week. Housing’s inability to maintain a rebound is one reason the economic recovery is not gaining speed.
Stimulus Debate
President Barack Obama said on July 15 that his economic- stimulus program is gradually pulling the U.S. out of its deepest recession in decades. Republicans have said the stimulus is wasteful, hasn’t reduced unemployment and has added to the record budget deficit.
“The president is walking a fine line” between stimulus and budget cuts, Roach said. “What the markets are ultimately going to want is far more specificity and credibility on deficit reduction and normalization of Fed policy.” Federal Reserve policy makers last month restated a pledge to keep the benchmark lending rate at around zero for “an extended period.”
Roach also said that the savings rate in China, one of the biggest buyers of U.S. debt, is still high and rising. “It is a savings rate driven more by fear than by life-cycle rational motives, if you deal with that fear, you can reduce that excess saving,” he said.
Reducing savings may boost Chinese domestic demand, helping the country to cope with weak exports to Europe and the U.S., where demand fell following the recession. China has depended on exports to the U.S. and Europe to fuel its economic growth over the past decades.
China’s Model
“China has to shift the model if it wants to continue to maintain rapid growth and avoid social instability, and focus on deriving support from internal private consumption,” Roach said.
Morgan Stanley cut its full-year economic growth forecast for China by about 1 percentage point to around 10 percent. Roach expects economic growth will hold at around 10 percent over the next couple of years.
“Per capita gross domestic product in China is still a real laggard,” he said. It will take China at least 50 years before China’s gross domestic product per capita catches up to “anything close” to that of the developed world, he said.
To contact the reporters on this story: Jurjen van de Pol in Amsterdam at jvandepol@bloomberg.net.
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